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Aug. 31, 2021, 2:33 p.m. EDT

Zoom stock plummets after earnings suggest investors may need to ‘realign their expectations’

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By Emily Bary

Zoom Video Communications Inc. shares are headed for their worst single-day percentage decline in almost 10 months after the company signaled that its growth rates will likely come back down to earth after several quarters of monster pandemic-driven gains.

The stock /zigman2/quotes/211319643/composite ZM -0.26% is off 16.4% in Tuesday morning trading as analysts debate whether the company’s growth opportunities in areas like Zoom Phone can outweigh churn, or customer turnover, among smaller clients.

See more: Zoom Video logs first billion-dollar quarter, but the stock is still falling

Needham analyst Ryan Koontz discussed Zoom’s outlook, which “implies ~flat [quarter-over-quarter] revs in Q3/Q4 from Q2,” something he said “is sure to raise investor concern.” He highlighted management’s acknowledgment of increased churn and slowing growth among customers with fewer than 10 employees, which he expects “could persist for multiple quarters, overshadowing progress in enterprise.”

Koontz, who has a hold rating on Zoom’s stock, also flagged his concern that Zoom “may be forced to renegotiate its all-stock acquisition price for Five9.”

Oppenheimer analyst Ittai Kidron pointed to the company’s strong momentum with its Zoom Phone offering, as total deployments doubled since the start of the calendar year. Overall, he saw a handful of long-term growth opportunities for Zoom, including with the Phone offering and with events, but he continued to express some caution on the stock.

“We believe the next 2–3 quarters could present challenges as a new usage ‘steady state’ is established, and we expect the shares to come under pressure in the near-term as shareholders realign their expectations,” he wrote, while maintaining a perform rating on the stock.

J.P. Morgan’s Sterling Auty noted that Zoom raised its full-year outlook by less than the amount of its revenue beat during the most recent quarter, and he saw issues of concern at the high end of the market.

“The share of revenue from the very low end actually held up better than we expected, which brings up some questions about the health of the enterprise growth,” Auty wrote, adding that the positives around Zoom Phone and margins wouldn’t be enough to counteract the pain from Zoom’s outlook.

“Listen, we still believe Zoom is a very good franchise with a tremendous amount of growth in its future, but we expect the market will need to rationalize a different level of growth post-pandemic into their valuation expectations,” he continued, while keeping his neutral rating on the stock.

Others were more upbeat, including William Blair analyst Matt Stotler, who highlighted that Zoom’s net-dollar expansion rate for customers with more than 10 employees was above 130% for the 13th straight quarter. Management expects to stay above that level in the fiscal third quarter and then be “right in that same range still” in the fiscal fourth quarter.

“We view this commentary as indicative of solid momentum in the upmarket segment of the business despite tough year-over-year comps,” Stotler wrote. “We believe that these metrics speak to the continued demand for Zoom products as businesses evaluate their communications stack in the return to work environment.”

He has an outperform rating on the shares, which have lost 2.8% over the past 12 months as the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.75% has risen 29.0%.

/zigman2/quotes/211319643/composite
US : U.S.: Nasdaq
$ 266.32
-0.69 -0.26%
Volume: 2.80M
Oct. 15, 2021 4:00p
P/E Ratio
80.46
Dividend Yield
N/A
Market Cap
$79.34 billion
Rev. per Employee
$599,586
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/zigman2/quotes/210599714/realtime
US : S&P US
4,471.37
+33.11 +0.75%
Volume: 2.05B
Oct. 15, 2021 4:46p
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